A Closer Look at a Trio of Cellar-Dwellers

 Fairholme Fund's (FAIRX) dismal performance so far this year has attracted much attention from investors and the media, and apparently has prompted many shareholders to withdraw their money. (To hear manager Bruce Berkowitz's recent discussion with Morningstar's Don Phillips,  click here.)

But Fairholme isn't the only fund enduring a painful 2011. Some others haven't drawn as much attention, but their position at or near the bottom of the first-half charts, and the depth of their underperformance, should pique the curiosity of industry observers. Although such short-term results can be misleading, a look at what's causing them, and a broader examination of the context, can provide useful lessons for all investors.

A Strong Start Hits Turbulence
 Putnam Voyager  manager Nick Thakore arrived at Putnam in late 2008, and a bit more than a year later the firm featured him in a full-page ad in the Wall Street Journal touting the fund's outstanding 2009 performance. The fund landed toward the top of the large-growth category in 2010, too. But this year's first half has not been kind to it. (Actually the slowdown began in the fourth quarter of 2010, when the fund roughly matched the category average.)

Through June 17, Putnam Voyager is down 6.3% for 2011, lagging the category average by more than 6 percentage points and landing in the 99th percentile of the group.

Among the culprits: A variety of stocks in the technology sector, where the fund has more than 30% of its assets, even more than the category norm. Most notable are  Hewlett-Packard (HPQ), which was the second-biggest holding at 3.2% of the portfolio as of March 31, 2011 (the most recent publicly released portfolio) and was still in the top 10 holdings at the end of May. Hewlett-Packard is down 16% so far this year.  Google (GOOG), also in the top 10 in both March and May, has dropped 18%.  Cisco Systems (CSCO), a 1.3% position at the end of March, has plunged 25% this year, though it's not clear whether the fund still owned it at the end of May.

Conversely, the fund owns almost nothing in the consumer staples sector, which has been one of the more successful areas in this year's rocky market.

Thakore had some success before coming to Putnam, and it's unlikely the fund will regularly sit at the bottom of the charts. But its first-half problems serve as a wake-up call to anyone who thought Thakore's stellar 2009 and 2010 showings indicated a bulletproof strategy.

The World Can Be a Tough Place
In the world-stock category, meanwhile, the 99th percentile is home to an offering much smaller than the $5.1 billion Putnam Voyager. This one has just $149 million in assets. But it comes from a prominent fund family and its manager runs much more money at other offerings. The fund, Fidelity Advisor Global Capital Appreciation (FGEAX), has plunged 15.6% so far this year, while the category average is slightly positive.

How could this fund be so far behind? Manager Tom Allen is willing to differ from the indexes, and while that kind of independent thinking can bring great success, it also carries risk. At the end of April, Fidelity Advisor Global Capital Appreciation had 19% of its assets in India, compared with a category average of just 1%. According to MSCI, India's market has performed worse (in most cases far worse) than nearly any other developed or emerging stock market this year. Only Peru and Egypt have plummeted further.

Meanwhile, in January--the date of its last full public portfolio--this fund owned Longtop Financial Technologies , one of the Chinese companies now embroiled in a highly publicized controversy over accounting issues. (It's not clear if the fund still owns that stock, or how much that may have contributed to the fund's losses, but at the end of January the fund had 1.5% of its assets in Longtop.)

The woes seemingly don't stop there. For example, a tiny U.S.-based company featured in the top 10 in both the full January portfolio and the March-end top-10 list, Nanosphere , has dropped sharply this year.

Like Voyager, this fund posted strong results for the two calendar years prior to 2011. Unlike Voyager, the current manager wasn't in place during that whole stretch; Allen became manager of Fidelity Advisor Global Capital Appreciation in February 2010. But he has run up a solid record over a longer period at the nearly $4 billion  Fidelity Advisor Mid Cap II (FIIAX) and other portfolios. So it would be wrong to judge him solely on a dismal half-year at Global Capital Appreciation. That said, it makes sense to pay attention, too. Global Capital Appreciation's portfolio, with its huge overweightings and uncommon--often very small--companies, accurately indicates what kind of fund it is, and what effects that makeup can have.

China Rising? Not Here.
Finally, The USX China  has returns that look like a typo. For the year to date, it has lost 48.4%. China's market has floundered this year amid concerns about rising inflation and slowing growth. Even so, the China-region category average shows a much milder loss of just 6%.

Few shareholders own The USX China, which has less than $10 million in assets. But its 2011 performance is worth noting. The fund invests in very small Chinese stocks, and its collapse this year, following a disastrous 2010, highlights how an appealing story in theory can turn into a heap of trouble in reality.

The fund's website describes management's interest in focusing on domestic consumption rather than exporters, which helps account for the abundance of very small companies in its portfolio. But with questions swirling about the accounting practices of certain Chinese firms listed on U.S. or Canadian exchanges, small Chinese companies in particular have been hit hard. The companies that have received the most notoriety in the recent "reverse-merger" controversy--Longtop and Sino-Forest --were not in this fund's portfolio as of the end of March. But many of the stocks the fund did own have themselves suffered shocking losses. Through June 17, the fund's annualized five-year return is negative 9.5%, 22 percentage points behind the China-region category average.

While readers probably weren't considering buying this fund, its travails highlight two important points. First, what might be a compelling story, such as the potential of undiscovered stocks in a fast-growing emerging market, does not necessarily make for an appealing mutual fund. Second, outsized gains alone don't provide a reason to buy. The USX China gained 35% in 2006 and 50% in 2007, but anyone who bought it at that point would be sorely disappointed with the devastating losses since then.